Interest rate derivatives in the negative-rate environment

Pricing with a shift

In recent times the ECB and other central banks have set their key lending rate to the negative domain. This is an exceptional measure designed to stir the economy. However, this brings in a significant stir into the valuations of even simple financial derivatives. Traditional models (such as the Black model) break down if the market forward rate or the strike of the option are negative.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see About Deloitte to learn more about our global network of member firms.